International Economic relations Essay Example | Topics and Well Written Essays - 2000 words

International Economic relations - Essay Example In some cases, entirely new loans were contracted to service interest only. At the same time bankers in the western world ignored signals of an imminent debt crisis and remained more than willing to refinance maturing loans of developing countries, but with shorter maturities. In this process, third world debt snowballed from $130 billion in 1973 to about $612 billion in 1982. Between 1975 and 1980 four countries had to postpone amortization payments while servicing interest only. The spark that ignited the LDC debt crisis can be readily identified as Mexico's inability to service its outstanding debt to the U.S. commercial banks and other creditors. The crisis began on August 12, 1982, when Mexico's minister of finance informed the Federal Reserve chairman, the secretary of the treasury, and the IMF managing director that Mexico would be unable to meet its August 16 obligations to service an $80 billion debt. Then by 1983 the number of countries defaulting on their repayments reached twenty one, and some third world countries had instituted state criminal processes against public figures on account of alleged negligence and mishandling of public money. The fact that the 1982 crisis occurred when there was a steep rise in interest rates in the U.S. underscores the significance of the capital outflow element of a financial crisis. The appreciation of the dollar at that time also means that repayments magnified the capital outflow in domestic currency terms. At the same time, the accompanying drop in dollar prices of internationally traded commodities undermined inflows derived from exports. It is also necessary to mention that the satiation described above is also reflected in the 1994 financial crises in Mexico, Turkey and Venezuela equally attributed to dramatic reversal of large scale lending to emerging markets, as well as the experience of Argentina in 1995 and East Asian economies in 1997. There is the argument that most of that crises were characterized with large amounts of international loans to forestall default, hence the rebuke of Mexico at the onset of the 1982 crisis worsened a financial condition that was potentially manageable. 1. Balance of Payments During the second part of the 1970s, and partially as a result of the oil price shocks, most countries in the world experienced large swings in their current account balances. These developments generated significant concern among policy makers and analysts, and prompted a number of experts to analyze carefully the determinants of the current account. As Edwards (2000) writes, the departing point was based on the recognition on two interrelated facts. First, from a basic national accounting perspective the current account is to savings minus investment. Second, since both savings and investment decisions are based on intertemporal factors - such as life cycle considerations and expected returns on investment projects, the current account is necessarily an intertemporal phenomenon. The Balance of Payments (BOP) is an account of all transactions between one country and all other countries - transactions that are measured in terms of receipts and payments. A country's international transactions can be grouped into three categories: Current account: records net flow of money into a country resulting from trade in goods and services and transfer payments made from abroad. The current account